Student Loans Company criticised over ‘penalty interest’ on funds

The Student Loans Company has been criticised for adding more than £8m to student debt through “penalty interest” on tens of thousands of loans in the last financial year.

Figures seen by the Guardian showed that the SLC put more than 33,000 people in England and Wales on to a “non-compliance interest rate” of 3% for failing to respond to requests for information or “losing touch” with the company.

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Seventy people each had more than £1,500 added to their loans between April 2016 and March 2017, with 5,480 charged the rate for the full 12 months.

Graduates with “plan two” loans – taken out after 2012 – are obliged to repay 9% of any earnings over £21,000, while interest is charged on a sliding scale of up to 3% plus RPI, which totalled 4.6% in 2016-17, depending on earnings. The maximum rate is due to increase to 6.1% in September.

The penalty interest, which is equivalent to the rate paid by the highest earners, is charged until the loan holder provides the required information. But even in extenuating circumstances the interest may not be retrospectively removed, according to the SLC, which highlights the small print in contracts signed by students.

Martin Lewis, the founder of moneysavingexpert.com, said: “I would hope in the case that extenuating circumstances are provided that the SLC retrospectively remove the interest. If people are having one strike and they’re out that seems to me an unfair system.”

He added: “This is something every student should know when they take their loan out. That is the responsibility of the students to read it and the SLC to tell them that: that communication strategy needs to be improved.”

Amatey Doku, NUS vice-president, said: “There is a vast difference between miscommunication and non-compliance. Penalties should be an absolute last resort. If a student or graduate is penalised they must always have the right to appeal, and this needs to be clearly communicated to them.”

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The SLC subsequently disputed their own £8m figure – releasedfollowing a freedom of information request – labelling it “factually incorrect”, because some of the interest would have been paid regardless of whether the non-compliance rate was applied.

A spokesperson for the SLC said: “The obligation on borrowers to keep SLC updated with their contact address and employment information is included in the terms and conditions of their loans. When a customer fails to respond to requests for information the regulations require that a non-compliance interest rate is applied.”

Four years ago, the SLC reportedly sent thousands of letters threatening a £150 fine after wrongly claiming that individuals’ circumstances had changed. Questions are also being raised about the administration of the penalty interest rates, introduced in April last year.

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Harriet Gable, a 23-year-old who graduated from the University of Southampton in summer 2015, received a letter from the SLC in May last year, which said the company understood she had become unemployed, despite no change in her employment status.

She had been working for Net-a-Porter for the previous eight months, and was earning £17,000 – ie £4,000 less than what is required to commence repayment.

Gable says she failed to respond to the letter, which was sent to her parents’ address, because she felt it was unnecessary given that she had a job.

“It was ridiculous. Why did they not know I was employed?” she said. “I don’t feel like there was any attempt to get information on their part. They were more interested in thinking, ‘let’s see if we can charge a penalty fee’. If they actually wanted to investigate they could have found out straight away.”

The penalty interest rate was never implemented, despite Gable being told in correspondence with the SLC that it was being applied, before the decision was overturned.

Nick Hillman, director of the Higher Education Policy Institute, cautioned that the SLC need to be able to contact people – particularly those in foreign countries – whom they have lost touch with.

“The SLC is always running to stand still but it should give the same focus to collecting money as it does to giving it out,” he said.

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